HMRC requires you to charge VAT on non-refundable deposits. So you must issue a VAT invoice for charges levied even if the customer does not use the goods or services. This came into force with effect from 1 March 2019, cancelling HMRC’s previous interpretation which allowed some non-refundable deposits to be treated as VAT free compensation.
This change mainly affects the hospitality industry, e.g. for hotel room bookings. However any business that retains forfeited deposits for unused services and uncollected goods may also fall within the updated policy.
HMRC previously allowed businesses to claw back VAT accounted for on deposits where the customer, in the end, did not use the service or collect the goods for which payment had been made.
That policy was largely based on the 2007 judgement of the Court of Justice of the European Union (CJEU) in Société thermale d’Eugénie-les-Bains, which ruled that deposits kept by a hotel for cancelled bookings had no direct connection with the supply of any service, so should be regarded as compensation for the loss suffered as a result of the cancellation. This view changed with the Air France-KLM (C‑250/14), and Hop!-Brit Air SAS (C‑289/14) case.
In the 2018 Budget, HMRC announced that changes will be made to the VAT treatment of deposits, with details to follow before the end of the year. The VAT man published Revenue and Customs Brief 13 (2018), setting new policy.
HMRC has concluded that, when a customer makes or commits to make a payment, it is consideration for a supply and therefore subject to VAT. HMRC says you can’t reclassify the payment to compensate the supplier for a loss once it is known the customer will not use the goods or services. The new policy is therefore that VAT is due on all retained payments for unused services and uncollected goods. VAT included in the initial charge must remain unless the payment is refunded. Only fully refundable deposits paid as security are outside the scope of VAT.
Businesses that charged VAT on non-refundable deposits before 1st March 2019 have applied the law correctly. They cannot make any adjustment to previous VAT periods to treat supplies in line with former policy, as no error was made.
You take a booking for a hotel room on 4 January 2019 for a one night stay on 17 March 2019. The price is £100 plus £20 VAT. Your hotel takes payment at the time of booking. The customer has no entitlement to a refund in the event of them cancelling or not using the room. Your hotel must account for the VAT when the payment is first made.
See the separate article which explains the VAT on termination fees.
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